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Crude oil enjoy impressive 2020, but where do we go now?

Energy prices continue to rise, with Brent hitting multi-month highs. Where now for the sector?

Energy prices continue to drive higher as reopening plans raise demand expectations

Energy prices have been on the rise over the course of the past ten months, with the dramatic events of April 2020 left behind in the rear view mirror. That recovery is understandably a reflection of the growing hope that the dramatic capitulation in demand will be temporary in nature.

Fortunately we are currently moving into a position where that long cycle of lockdowns and restrictions on movement could be close to coming to an end. That benefits energy prices in two ways, with risk-on sentiment and enhanced demand projections both elevating crude forecasts.

The image below highlights the OPEC demand forecast, with the group expecting the second quarter to provide the bulk of the recovery in demand.

One element for traders is question of just how far this can go. The monthly chart below includes a linear regression line passing through the middle, highlighting the direction of travel and mid-point for price action over the past 13 years.

Put simply, while we were back down at $40s and $50s, things certainly looked very cheap from a historical perspective. Now that we are in the mid $60s, it is a question of what the drivers are and whether it is justified to keep rising.

One thing to note is that we have seen this market respect long term 76.4% Fibonacci retracement levels in both 2011 and 2018. With that in mind, the current rise could target yet another $76.4% Fibonacci level at $70.69.

Does the Biden administration change the supply outlook?

US President Joe Biden undoubtably has a more green agenda compared with his predecessor, with some speculating that this could lead to a decline in supply from the worlds biggest oil producer. Certainly his moves to cancel the Keystone XL pipeline permit and rejoin the Paris climate agreement don’t exactly scream pro-oil.

However, with Biden seeking to push through a major stimulus package, we are likely to see an uptick in demand that could help elevate prices over the near term.

One key element for traders to follow is exactly how US-Iran relations progress, with Biden’s campaign promise to resume their nuclear deal bringing a rise in crude output from the often-maligned nation.

Will rising energy prices drive inflation higher

One key aspect for markets going forward will be inflation, with the rise in energy prices likely to permeate throughout the economy.

That increase in costs for businesses will undoubtably lift inflation over the course of 2021, and markets will be watching very carefully given the potential impact that could have upon monetary policy.

Thankfully, the recent US Federal Reserve average inflation targeting policy does allow for a greater degree of flexibility if inflation overshoots the 2% threshold.

Nevertheless, traders should keep a close eye on inflation levels as a key driver of sentiment given the possible impact it could have upon the central-bank thinking.

Brent crude uptrend continues until it doesn’t

Brent crude has managed to push into multi-month highs this week, yet the price has been consolidating today as it trades around $62.69.

That level is going to be key here, with a break lower bringing the potential for a wider retracement into the $61.00 region.

Nevertheless, we are looking at a highly trending market here, with further upside likely before long. A break below the $60.12 would be required to negate the bullish outlook.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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